EC-690-W
Creating economic opportunity is a challenge facing many rural communities. One aspect of community economic development that concerns some local leaders is access to consumer services. The availability of a wide range of retail services within a reasonable distance of home is considered by many people to be an advantage. Changes in retailing, such as the movement of large discount department stores to rural areas, have altered rural spending patterns. These and other changes in retailing concern rural consumers, local leaders, and existing retailers who must operate in this new environment.
Communities considering the expansion of retail opportunities as an economic development strategy must realize its limitations. Retailing generally does not create new jobs and income; it only captures them from nearby communities. Thus, it is important for local leaders to take a diversified approach to community economic development. Attracting and retaining good jobs that pay reasonable wages, maintaining infrastructure, and providing adequate public services are examples of other important economic development strategies. The goal of maintaining the presence of a healthy retail industry in a community is just one aspect of an effective long-term economic development strategy.
This publication provides information from the 1987 and 1992 Census of Retail Trade and the 1994 Statistical Abstract of the United States (SAUS) to help communities understand retail sales trends in Indiana. The publication begins with an explanation of the pull factor, which is a measure of the strength of a community's retail sales, and an examination of retail trends in Indiana counties. The publication then examines the impact of large discount department stores in rural areas, and closes with a brief summary.
Most communities would like to have a well-developed retail sector because it means that consumers have access to a wider array of goods. In states that have a local sales tax there is an even greater incentive to maintain a viable retail sector, because it generates revenues for local government. One measure of the extent to which a county is capturing retail sales is the pull factor. A pull factor is the ratio of actual retail sales to potential retail sales, with potential retail sales calculated as shown in Equation 1.
This equation shows that potential retail sales are a function of state average retail sales per capita and local income and population. The higher the average local income or population, the higher the potential retail sales.
(State Retail Sales) (Local per Capita Income)
Potential Retail Sales = -------------------- x ------------------------ x Local Population
(State Population) (State per Capita Income)
The equation calculating potential retail sales relies on several simplifying assumptions. First, it assumes that expenditure patterns are the same in all communities. But the expenditure patterns of a community may be different from the state average. For example, people over 65 generally spend a higher proportion of their income on health care (SAUS, Table 164), which implies spending a lower portion of income on retail goods. Hence, potential retail sales may be overstated in communities with a high proportion of retired persons. Likewise, in high-cost areas, households tend to spend a higher proportion of income on housing (SAUS, Table 705), which may crowd out purchases of retail goods.
A second assumption is that individuals spend a constant proportion of their income on retail goods as opposed to other expenditures. For individuals this is generally not true, because those with higher incomes tend to spend relatively more of their income on services than do low-income individuals (U.S. Department of Labor, 1993) and relatively less on retail goods. Given this relationship, we might expect potential retail sales to be overstated in higher income communities and understated in lower income communities.
All communities lose retail sales to other communities, and all capture retail sales from consumers in other communities. Losses of sales are referred to as "leakages." Examples of the leakage of retail sales are expenditures on trips to neighboring counties to purchase everyday items, money spent on "big ticket" items such as cars and major appliances that may not be available locally, and money spent on vacations in nearby or more distant locations. Expenditures by nonresidents represent retail sales captured from other counties.
The degree to which a community captures retail sales from, and loses retail sales to, other communities is reflected in the pull factor. A pull factor greater than 1.00 indicates that a community is capturing more retail sales from consumers in other communities than it is losing, given local population and income levels. A pull factor less than 1.00 means that a community is losing more retail sales than it is capturing in expenditures from nonresidents. A pull factor of 1.00 indicates that a community is just capturing the amount of retail sales expected. Figure 1 shows retail sales pull factors in Indiana counties in 1992.
As Figure 1 illustrates, 24 of Indiana's 92 counties have pull factors greater than 1.00. Seventeen of these 24 counties are located in metropolitan areas, which suggests that metropolitan areas are serving surrounding rural counties as regional retail service centers. Four of the seven rural counties with pull factors greater than 1.00--Wayne, Jackson, Dubois, and Jasper--are located quite a distance from the center of the nearest metropolitan area and appear to take on the characteristics of retail trade centers themselves.
In some instances these data may be misleading. For example, Vigo County has a large mail order company which sells to consumers nationwide. Such a business behaves like a manufacturer that exports products outside the local area, creating jobs and income locally. From an economic development perspective, this is desirable. But this business does not increase the availability of goods to local consumers and distorts the pull factor as a measure of retail sales capture from nearby counties. As this example illustrates, knowledge of the local economy can be very helpful in the proper interpretation of pull factors.
Trends in retail sales can be shown by examining pull factors over time (Table 1). Figure 2 shows the change in county pull factors from 1987 to 1992. Rural areas experienced the greatest amount of change in retail sales patterns. Of the 33 counties whose pull factor changed by 0.10 or more, 23 were rural counties. Rural areas may be more susceptible to large changes in magnitude because their economies are usually smaller. If a major retailer leaves a rural area, consumers may have no alternative but to shop in another county, while urban consumers can shift their shopping to other nearby retailers. Wide variations in retail sales gains and losses in rural areas also are consistent with the movement of large discount retailers into rural areas. This is the subject of the next section.
One major change in rural retailing has been the expansion of Wal-Mart and other mass merchandise stores in rural areas. Stone (1991, 1993) examined the impact of Wal-Mart in Iowa. Using pull factors, he found that those rural towns in which Wal-Marts are located captured an increasing share of retail sales, while those that did not have a Wal-Mart experienced declines in total retail activity. Increases in retail sales can be caused by capturing an increasing share of local demand, reducing leakage of retail sales to neighboring towns, or by capturing sales from consumers in nearby towns and rural areas.
Stone reports that, within Wal-Mart towns, retailers who sell the same goods as Wal-Mart are subject to losing sales. Merchants who sell goods that are different from what Wal-Mart generally gain sales because Wal-Mart attracts more shoppers to the town, creating spillover effects to these merchants. He also found that non-Wal-Mart towns near Wal-Mart towns suffer because many consumers now choose to shop in Wal-Mart towns.
Indiana data tend to support the findings in Iowa. The 31 rural counties that have Wal-Marts have an average pull factor of 0.93. This compares to an average pull factor of 0.60 for the remaining 24 rural counties without a Wal-Mart. Of course, Wal-Mart itself contributes to a county's pull factor, simply because it's one more retail establishment. However, it appears that Wal-Mart's contribution to the pull factor is larger and more significant than can be explained by the simple addition of another retail store.
Retail sales in Wal-Mart counties also tend to be stable or growing, while non-Wal-Mart counties are more likely to be experiencing declining pull factors. Only two (6%) of the 31 counties with Wal-Marts had their pull factor decline by 0.05 or more between 1987 and 1992, while nine (38%) of the 24 rural counties without a Wal-Mart experienced a decline in their pull factor of greater than 0.05. While there is not yet enough data to prove that the presence or absence of a Wal-Mart causes these changes, there is sufficient evidence to suggest that such a relationship does exist.
The ability of a community to capture retail sales is important to maintaining consumer services. The information in this publication may help local leaders assess the health of the retail sector in their county and in neighboring counties. The report highlights changes in retail sales patterns that are occurring statewide and particularly in rural areas. The reader is cautioned that pull factors are only a descriptive tool and provide only one small piece of information with which to evaluate the health of the local retail sector.
Local leaders must keep in mind that increasing their share of the retail pie only redistributes sales across jurisdictions. It does not create new income. Hence, retail expansion creates economic development only at the expense of other, nearby communities. As an alternative to trying to stem the tide of lost retail services, local communities may be better off utilizing scarce resources to improve infrastructure, attract and retain employment and income, or improve public services.
Stone, Kenneth E. "Competing With the Mass Merchandisers." Small Business Forum, Spring, 1991, pp. 33-45.
Stone, Kenneth E. Impact of Wal-Mart Stores and Other Mass Merchandisers in Iowa, 1983-1993, Department of Economics, Iowa State University, Mimeo, 1993.
United States Department of Commerce, Economics and Statistics Administration, Bureau of the Census. Statistical Abstract of the United States, 1994.
United States Department of Labor, Bureau of Labor Statistics, Consumer Expenditure Survey, 1990-91, Bulletin 2425, September, 1993. xble
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Cooperative Extension work in Agriculture and Home Economics, state of Indiana, Purdue University, and U.S. Department of Agriculture Cooperating; H.A. Wadsworth, Director, West Lafayette, IN. Issued in furtherance of the acts of May 8 and June 30, 1914. The Cooperative Extension Service of Purdue University is an affirmative action/equal opportunity institution.